This blog is written by Brian E. Barreira, an estate planning, probate and elder law attorney with offices at 118 Long Pond Road, Suite 206, Plymouth, Massachusetts, and 175 Derby Street, Unit 19, Hingham, Massachusetts. Brian has been named a Massachusetts Super Lawyer® in Boston Magazine in 2009-2017 and is listed in The Martindale-Hubbell Bar Register of Preeminent Lawyers in the fields of Elder Law and Trusts & Estates, Wills & Probate. Brian's biographical website can be found at SouthShoreElderLaw.com

Nothing on this blog should be considered to be legal advice or tax advice.

Having recommended the idea of spousal refusal more and more, I researched the topic again the last time I was at the Board of Hearing searching for new trust decisions. I have found three more fair hearing decisions regarding spousal refusal: 1709521, 1713783 and 1800448. In all three cases, the spouse at home refused to cooperate financially with the MassHealth application of the institutionalized spouse, and was allowed to keep assets without even having to disclose them. (Other fair hearing decisions on this issue can be seen at Must Both Spouses Always Cooperate When There Is a MassHealth Application for One of Them?)

Spousal refusal may in some cases be a better move than purchasing a single premium immediate annuity, especially where there is a chance that Congress will change the federal Medicaid law that allows such annuity payouts to belong completely to the community spouse and instead begin treating one-half of the annuity as the institutionalized spouse’s income.

In a Suffolk Superior Court case that I filed in January, 2018, which later was consolidated with a similar case filed Attorney Nicholas G. Kaltsas in March of 2018, we have attempted to stop ongoing due process violations by the Office of Medicaid, which is part of the Executive Office of Health and Human Services. To show the Court that we are not alone in our concerns about what the agency has been doing for years, we asked for help from the elder law bar, and we thank the following persons (almost all of whom are Massachusetts lawyers) for the following affidavits, all of which have been filed with the Court.

Due to their concerns about possible impact of nursing home costs on their assets, many aging clients feel under pressure to make transfers of their assets earlier than may otherwise be advisable. One relatively simple way to make such a transfer more palatable to a client is to suggest that the client reserve a non-general power of appointment, also known as a limited or special power of appointment (“SPA”), in a deed or irrevocable trust.

By use of the SPA, each remainderperson (the persons inheriting the remainder of an irrevocable trust, or the persons to whom real estate was deeded) would have a vested remainder subject to divestment. If the SPA is never exercised, however, the property will eventually be owned by the persons or entities (and in the proportions) originally planned.

The possible alternate recipients of the property named or described in the SPA can be any person or entity, but for tax and MassHealth reasons, the SPA should exclude the client, the client’s creditors, the client’s estate, and the creditors of the client’s estate. (If the SPA limits the appointment power to a group, under settled law the power automatically excludes the client’s creditors, the client’s estate, and the creditors of the client’s estate.) A power which includes any of this group could be treated as a general power of appointment under Internal Revenue Code sections 2041 and 2514 and saddle the holder of the power with unintended MassHealth consequences. For MassHealth purposes, the client’s spouse should also be excluded.

Why does a reserved SPA work in MassHealth planning?

Two key elements in MassHealth planning are that the property not be reachable by a creditor (such as the state MassHealth program), either (1) during the client’s lifetime or (2) after the client’s death. A transfer which is subject to a reserved SPA can meet both of these tests. As long as the property is vested, albeit defeasibly, in entities or persons other than the client and the client’s spouse, and as long as neither of them have any power to revest the property in themselves, the property should be deemed transferred for purposes of beginning the running of the MassHealth disqualification period. If nursing home care is not needed during the MassHealth disqualification period, the property is protected in case the need for nursing home care should subsequently arise (unless, of course, federal Medicaid laws change retroactively, an occurrence which is always a risk in MassHealth planning).

Since the MassHealth disqualification period would begin to run upon the original transfer, any later exercise of the SPA should not cause any additional period of MassHealth disqualification.

Tax benefits of reserved SPA to the client

The control afforded by the SPA has tax ramifications. Internal Revenue Code section 2038 will treat the transferred assets as if they had not been transferred, and the full fair market value of the assets as of the client’s date of death will be includible in the client’s federal gross estate. If the assets had appreciated in value during the time of the client’s ownership, this result will often be advantageous to the transferees, as Internal Revenue Code section 1014 then gives each asset a “stepped-up basis.” This means that the value at which each asset is includible in the client’s federal gross estate will then become the asset’s new basis (i.e., the figure above which federal capital gains taxes would later be assessed upon a sale of the asset).

The SPA prevents a completed gift from being made for gift tax and capital gains tax purposes. Under Treasury Regulation Section 25.2511-2(b), the funding of an irrevocable trust or deeding of real estate with an SPA would be considered an incomplete gift.

In an irrevocable trust, a reserved SPA which allows the client and/or the client’s spouse to make lifetime gifts out of the trust fund invokes the grantor trust rules (found in Internal Revenue Code sections 671 through 679). Upon a future sale of the home, the use of the client’s $250,000.00 capital gains exclusion under Internal Revenue Code section 121 may thus be preserved. Since a gifting aspect of the SPA may be required in order to activate the grantor trust rules as to principal, the client could reserve an SPA which allows him to make unlimited lifetime gifts to charitable organizations. Under this approach the client should not be deemed to have even indirect access to the trust fund, but be leery of the Supreme Judicial Court’s shockingly ignorant comment in the 2017 Daley case about a power of appointment that allowed gifts to nonprofit organizations. Because the SJC’s dicta will undoubtedly be considered to be an educated comment (although the issue had not been briefed or even mentioned by the parties), it may be advisable in drafting to take pains to specify that the powerholder cannot make a gift to pay a debt; somehow the SJC justices did not seem to consider that basic concept when issuing its kneejerk comment.

It should be noted here that, despite the opinion of one legal commentator, an SPA in a deed does not necessarily allow the transferor to make full use of the transferor’s $250,000.00 capital gains exclusion under Internal Revenue Code section 121. If the transferor wishes to move in the future to a smaller, less expensive home, the drafting lawyer should consider placing the home into an irrevocable grantor trust in order to preserve this exclusion.

Example of use of reserved SPA in a deed

Consider the following use of a reserved SPA in a deed: “John Smith hereby grants to his daughters, Mary Smith, Jeanne Smith, and Cheryl Jones, as joint tenants with right of survivorship, the following premises……John Smith reserves the power, exercisable as often as he may choose, by an instrument recorded at this registry of deeds during his lifetime, to appoint these premises, outright or upon trusts, conditions or limitations, to any one or more of his issue or their then current or surviving spouses.”

If Mary, Jeanne or Cheryl are sued, file for bankruptcy, file for divorce, marry a man for whom John feels little affection, become disabled or incompetent, have a falling out with John, or undergo some other change in circumstances or character, John can eliminate the daughter’s interest, can set it up in trust for the daughter and/or her husband, widower or issue, or can make it subject to a right of first refusal.

The SPA may also be of great utility if a daughter predeceases John. By exercising the SPA he could eliminate her interest and the need for probate of her estate. If in the absence of the exercise of the SPA he were to inherit her share of the home, however, a new MassHealth disqualification period may thus begin to run. If this gift had been made to the daughters as tenants in common, upon a daughter’s death John could be revested with the daughter’s share, and an exercise of the SPA could thus begin the running of a new MassHealth disqualification period.

In the above example of a gift to Mary, Jeanne or Cheryl as joint tenants with a reserved SPA in John, the deed could be recorded and the running of the MassHealth disqualification period could begin without time being spent in reviewing or altering the estate plans of John’s daughters. Upon a daughter’s death where the daughters hold title as joint tenants, and upon John’s later exercise of his SPA, he would not begin the running of a new MassHealth disqualification period because he would not have inherited any interest. (If his testamentary wish were per stirpes, however, the possibility of his later becoming incompetent to exercise the SPA makes this maneuver risky, even if it were meant to be temporary.)

Example of use of reserved SPA in an irrevocable trust

Consider the following use of a reserved SPA in an irrevocable trust: “John Smith reserves the power, exercisable during his lifetime as often as he may choose, to appoint any part or all of the principal and income of the trust fund, outright or upon trusts, conditions, or limitations, to any one or more of his issue or their then current or surviving spouses, or to charitable organizations.”

Much of the above discussion regarding deeds also applies here, except that in a trust the remainder interest would not become vested until John’s death, so that a per stirpes testamentary disposition can be initially established without concern for any daughter’s estate plan, or lack thereof.

Should an SPA have self-destructing language?

A future complication could be caused by use of a simple SPA, for a meticulous conveyancing lawyer may require proof that the SPA was not exercised by will. In such a case the transferor’s will may have to be probated, perhaps solely for this reason. This complication can be eliminated by language in the deed or trust which causes a conclusion presumption of the failure to exercise the power by will or codicil if notice of the establishment of probate proceedings is not recorded in the chain of title within a certain time frame after the transferor’s death.

Is the insertion of a life estate and/or an SPA in a deed a better overall move than the establishment of an irrevocable trust?

Irrevocable trusts have for a few years now been under attack from lawyers at the Office of Medicaid, and as one elder law attorney once said to me, no client wants to be a test case. The inclusion of an irrevocable trust in a MassHealth application right now is practically a guaranteed denial, and the outcome of the fair hearing appeal is often based on which hearing officer is assigned to your case. See www.irrevocabletrust.info for over 200 recent fair hearing appeals regarding irrevocable trusts, with the Office of Medicaid Board of Hearing’s appalling lack of knowledge of trust law and utter disregard for administrative consistency being the main points one can take from a close reading of the hearing decisions.

The combination of a life estate and a SPA usually has the same estate tax result as an irrevocable trust, with a step-up in basis received by the remainderpersons, but does not have the same capital gains tax result upon a lifetime sale, where an irrevocable trust would often not be subject to capital gains taxes but the remainderpersons would be subject to them. These lifetime capital gains tax issues, centralized management and the fiduciary duties of a trustee may be the main advantages of an irrevocable trust, but other issues may be of greater importance to the client.

The nonexistence of fiduciary duties on the part of the remainderpersons in a deed with a life estate and/or SPA would prevent the deed from being treated as a trust under Medicaid law. Further, an SPA reserved by the client should not be subject to a lifetime lien or post-death estate recovery because it is not a property interest. (See Restatement 3rd Property (Wills and Donative Transfers) §22.1 Comment a (“a nongeneral power of appointment is not an ownership-equivalent power.” Also, see Restatement 2nd (Donative Transfers) 13.6, Comment b (“Where a non-general power has been created, the donee is not in the position of an owner either as a matter of common law doctrine or the practicalities of the situation.) ) Still, proposed regulations issued but he Office of Medicaid in November of 2016 treated a deed with both a life estate and an SPA as a trust, so it is probably best for long-term planning purposes not to have both of them in the same deed.

Besides the capital gains tax ramifications for a sale during the client’s lifetime, there are significant reasons that an irrevocable trust may not be the better move. An irrevocable trust is set in stone, whereas persons to whom the real estate is transferred could choose to adapt to changing circumstances. For example, an irrevocable trust could not ever participate in a reverse annuity mortgage due to the prohibition of principal to its settlor, but the remainderpersons in a deed could someday choose to expose their own established personal financial interests in order to obtain such a mortgage. In addition, for the first 5 years after a transfer, a life estate or an SPA would actually be better than an irrevocable trust, because the remainderpersons could choose to transfer the real estate back to the client and cure the disqualifying transfer, whereas the funding of an irrevocable trust would doom the client to the consequences of waiting 5 years and a day before applying for MassHealth.

Under the Rule 1.4(b) of the Massachusetts Rules of Professional Conduct, a “lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Under Rule 1.0(f), the term “informed consent” is defined as “the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.” The recommendation of an irrevocable trust to a client when there are other, simpler ways to accomplish the client’s primary goals may fall short of that standard.

In the 2017 case of Ajemian v. Yahoo!, Inc. the Supreme Judicial Court of Massachusetts (“SJC”) has decided that federal law does not prohibit an internet service provider from voluntarily disclosing the contents of a decedent’s e-mail account to the Personal Representative of the decedent’s estate.

Unfortunately, the SJC chose to sidestep the issue of whether the Terms of Service agreement (i.e., that take-it-or-leave-it agreement we all have to accept when opening an email account) could by itself allow an internet service provider to prevent an estate from having access to a decedent’s email account. The SJC remanded the issue back down to the Probate Court. That means the SJC wrote a lot of words but accomplished very little, and the successful plaintiffs in Ajemian have to continue to spend funds in the Probate Court litigating the sidestepped issue. There is a lot of time and expense put into a case before it gets to the SJC, and it is a shame when the SJC chooses to do the bare minimum.

In an ironic dissent to the remand, Chief Justice Ralph Gants (who a few months ago had chosen to sidestep a simple issue in the case of Daley v. Secretary of the Executive Office of Health and Human Services and had forced the issue to be remanded) all of a sudden became concerned about fairness to litigants opposing large, well-funded entities, writing:

“Not only is the remand unnecessary, but it also is unfair to the plaintiffs. The additional cost of further litigation is … a heavy financial burden. … The plaintiffs should not have to spend a penny more.”

Less than five months earlier, it had apparently been acceptable to Chief Justice Gants in Daley when a large state agency was shown to be abusing its authority and treating MassHealth applicants unfairly; he never said one word about that issue in his written opinion. (It is now almost five months after remands were ordered by the SJC, and the agency has taken no steps to advance the remanded cases.) Hopefully, the litigants in Ajemian will have their issues resolved in the court below and not have to go back up to the SJC, but I predict that the case will be brought back up there; the SJC made the choice to waste everybody’s time writing a partial decision when the sidestepped, remanded issue was already briefed and in front of the Court; you can read all of the briefs at http://ma-appellatecourts.org/display_docket.php?src=party&dno=SJC-12237. (Contrast those actions, ignoring a briefed issue in Ajemian, with the SJC’s actions in Daley, where it wrote about issues that hadn’t even been briefed or argued. It is perhaps time for the SJC to have a new leader who can wrangle some intellectual and procedural consistency out of this Court.)

Note that, as mentioned in Ajemian, Massachusetts General Laws, Chapter 190B, Section 3-709 could allow the Personal Representative of an estate to have access to the decedent’s assets, but also note that the law begins with “[e]xcept as otherwise provided by a decedent’s will.” Thus, it is possible that a decedent’s will could deny access to email accounts and other such digital assets. If you have something in your online history that you don’t want to be seen after you are gone, you may want to add a provision into your will that not only denies access to the account but also directs the destruction of the email account or other digital assets.

An impatient trust beneficiary is one of my cases began demanding distributions from the decedent’s revocable trust within a month of the settlor’s death. The Trustee has no problem making the earliest possible distributions, as long as the Trustee can have no personal liability for doing so. Other than unpaid income tax liabilities of the decedent, the only major problem that should be of concern to the Trustee could be a lawsuit against the trust by one of the decedent’s creditors. Thus, the question is when, under current Massachusetts law, can a Trustee end up being personally liable to then-unknown creditors after making distributions to the beneficiaries of the trust.

The Massachusetts Uniform Trust Code (“MUTC”), which took effect in 2012, allows creditor claims against revocable trusts; see (a)(3) in Massachusetts General Laws, Chapter 203E, Section 505. The MUTC is otherwise silent about what that means. The Massachusetts Uniform Probate Code, at Massachusetts General Laws, Chapter 190B, Section 3-803, states in (a) that creditors are out of luck unless they file a lawsuit against an estate within one year of the decedent’s death; and states in (b) that a Trustee is treated the same as the estate’s Personal Representative. Thus, a revocable trust is treated the same as an estate, which has a period for creditor claims of one year after the decedent’s death, and the Trustee of a revocable trust therefore can, without being liable to unknown creditors, safely make distributions twelve months and a day after the settlor’s death. Note, however, that this analysis applies only to normal creditors, not the decedent’s unpaid income tax liabilities, for which the Trustee would remain personally liable.

When the community (i.e., at home) spouse cooperates with a timely MassHealth application, the community spouse has financial options to preserve assets and income. One such option (although it should never be the first and only choice that is considered) is the purchase of a single-premium, irrevocable, nonassignable annuity with excess assets (i.e., those assets — other than the principal residence — in excess of the community spouse resource allowance, which is currently $120,900.00 during 2017).

Cooperation with the institutionalized spouse’s MassHealth application is not always in the best interests of the community spouse. What if the community spouse had maintained separate assets from the institutionalized spouse under a prenuptial agreement? What if the spouses had been legally separated but had not ever filed for divorce? What if the community spouse does not want to buy an annuity for financial or health reasons? What if the community spouse has made recent gifts or established a trust and wants to prevent those matters from being considered for the institutionalized spouse’s MassHealth application? Fortunately for those community spouses, a process known as “spousal refusal” is an option for a community spouse who does not want to cooperate with the MassHealth application.

There have been nine fair hearing decisions that I have recently found at the Massachusetts Office of Medicaid’s Board of Hearings on the issue of spousal refusal: Appeal 0307174, Appeal 0402108, Appeal 0607185, Appeal 0711322, Appeal 1007332, Appeal 1216920, Appeal 1412045, Appeal 1600586 and Appeal 1601683. Based on a thorough review of those fair hearing decisions and the current MassHealth regulation at 130 CMR 517.011, it appears that the community spouse must put into writing the refusal to cooperate, then, if the institutionalized spouse is not proved to be incompetent, an assignment by the institutionalized spouse must be made of spousal support rights to the MassHealth agency, which under Massachusetts General Laws, Chapter 118E, Section 1 is the Executive Office of Health and Human Services. At that point, the community spouse’s assets and income are not considered as part of the application.

Spousal refusal is authorized by federal Medicaid law at 42 U.S.C. s. 1396r-5(c)(3), and is done throughout the nation. The risk of spousal refusal is that the state Medicaid agency could file a lawsuit against the community spouse for support of the institutionalized spouse (and the community spouse then could end up in a much worse position than if an immediate annuity had been purchased), but to my knowledge such a lawsuit has never occurred anywhere.

The basic part of the decision was easy for the Court. The Court ruled that a person’s home in an irrevocable trust must be treated the same as any other asset. According to the Court, the right to live in the home does not cause the principal of the trust to be a countable asset for MassHealth purposes, and is merely the equivalent of having the right to the income generated from renting it out.

The Court sidestepped the issue as to whether it is problematic to have a right to be reimbursed from trust principal for taxes that under federal income tax law had rebounded from the trust back to the settlor’s personal tax returns. Under federal income tax law, a trust can be irrevocable yet have certain sentences that cause the income and capital gains of the trust to be taxable not to the trust, but rather to the settlor. This type of trust, known for many decades by the IRS and tax practitioners as a grantor trust, but embarrassingly referred to by the SJC twice in its opinion as a “grantors trust,” is commonly drafted for Medicaid planning purposes. The SJC remanded this tax issue (which, even though we had briefed it, had not been decided below) back to the agency for its consideration, which essentially means further litigation.

The Court had on its own initiative consolidated our Daley case with the Nadeau case, and in Nadeau the Court commented on something that had gone unmentioned by the agency in its briefs at the fair hearing, in Superior Court and at the SJC. It is indeed an oddity for any court to comment on an unmentioned and unbriefed issue without requesting briefs, and it is a travesty when the court blurts out something ignorantly. Here, the Court noticed a provision in the Nadeau trust known as a power of appointment, and the power allowed gifts to be made to nonprofit organizations. The Court then “reasoned” that this power to make gifts could possibly be used to make payment of the powerholder’s nursing home bills whenever staying in a nursing home that is run as a nonprofit organization. In this dicta, the court did not even bother to try explaining how having a power to make a gift could equate with having the gift applied to your debt, especially where the recipient of the gift would have to act collusively and in violation of fiduciary duties for the gift to be applied to the debt. The petition for rehearing accurately spelled out the longstanding law about powers of appointment, but the court chose not to edit its written decision, even leaving in its new phrase “grantors trust” as an embarrassment for the ages.

As could be expected from the Office of Medicaid’s recent antics, the agency is already misstating what the SJC’s decision said, so the litigation over irrevocable trusts will continue in Massachusetts. Anybody who already has an irrevocable trust should immediately have it reviewed by an elder law attorney in light of this new SJC decision, and any trust (or deed) that mentions non-profit organizations, tax reimbursement or the right to use and occupancy of the home may need to be changed.